High Taxes (and the 1950s)

[Surlethe]

An argument against an increasing marginal tax rate points out that with high progressive taxes, rich people are going to move themselves and their money out of the country. Of course, this presumes that the cost of paying extra taxes on each additional earned dollar is less than the cost of moving themselves and their assets, plus the difficult-to-quantify cost of uprooting themselves from their country of birth and moving into an entirely new culture. It would make sense that if taxes on rich people are increased little-by-little, the exodus will not be terribly large. This seems similar to the response of the job market to a reasonable minimum wage increase. I would think that the best way to rebut a qualitative argument like this is to point out that the effects are almost certainly overstated, and draw attention to the underlying values systems.

Whenever high taxes are brought up, I tend to see the 1950s thrown around as an empirical rebuttal to the notion that high taxes stifle growth and drive away rich people. Throughout the '50s, the highest tax bracket was upwards of 90%, and yet the US economy grew fine, and (presumably) the socialites didn't leave the country in mass numbers. Is comparing the '50s to the current US fair? It doesn't seem so, for several reasons. First, there was nowhere for rich people to go: everywhere else in the world had been devastated by World War II, save Canada. Second, I understand that the US economy was investing majorly into Japan and Western Europe, which is not present in the modern US (is it?). Third, I don't know if money flowed as freely across borders then as it does today. And fourth, the US economy was still picking up capital slack from the Great Depression as demand grew back.

In any case, while the 1950s does serve as an example that high taxes by themselves won't utterly devastate economies, it seems that it's mildly inaccurate to draw any more conclusions by holding up the US now to the US in the 1950s and comparing them. Any thoughts? My knowledge is almost certainly imperfect, and I'm sure there are some holes in my reasoning.

[Patrick Degan]

The issue has less to do with the top marginal tax rate as much as how the burden was spread out per tax bracket. The 50s had a far more equitable distribution of the taxation burden with a lesser share falling on the shoulders of the middle and working classes, which allowed a more general distribution of wealth which shored up the backbone of the economy. Also note that while the top marginal personal and corporate rates hovered past 80%, the deductions then favoured capital reinvestment as a means of avoiding those rates, thus providing a mechanism which stimulated real industrial development.

[Surlethe]

The issue has less to do with the top marginal tax rate as much as how the burden was spread out per tax bracket. The 50s had a far more equitable distribution of the taxation burden with a lesser share falling on the shoulders of the middle and working classes, which allowed a more general distribution of wealth which shored up the backbone of the economy.

Instead of 10%, 15%, 25%, 28%, 33%, 35%, it was something more like (say) 5%, 8%, 10%, 18%, 35%, 60%, 90%? My google-fu is weak today, so I can't find any actual numbers.

Also note that while the top marginal personal and corporate rates hovered past 80%, the deductions then favoured capital reinvestment as a means of avoiding those rates, thus providing a mechanism which stimulated real industrial development.

So it wasn't just the growth opportunity, it was that the tax code was structured differently. That makes sense.

(By the way, the top corporate income tax bracket was 52%.)

[Patrick Degan]

(By the way, the top corporate income tax bracket was 52%)

So noted.